Company insolvencies in the UK reached near-record levels in 2025, with the controversial IR35 and off-payroll working rules emerging as contributing factors to the crisis
Government data has shown monthly company insolvencies have consistently hovered near 30-year highs throughout 2025, with 13,453 individual insolvencies registered in England and Wales in December 2025. This represented a spike from the 2,238 registered in May alone, according to The Insolvency Service.
The government said the December numbers were affected by a temporary backlog. However, the total number of individual insolvencies for November and December 2025 was 15% higher than the equivalent two months of 2024, Newspage reported.
Rohit Parmar-Mistry, Founder at Burton-on-Trent-based Pattrn Data, said something radical needs to happen to change the direction for UK small business owners.
“The government is quick to blame a ‘temporary backlog’ for these figures,” said Parmar-Mistry in a Newspage report.
He continued,
As someone who works in tech, I know a data glitch when I see one, but a 15% year-on-year rise isn’t a glitch. It’s a trend. You can backlog the paperwork, but you can’t backlog the misery of 13,453 people hitting the financial wall in a single month.
While IR35 is rarely the sole cause of a business failure, industry experts say it has acted as a catalyst, straining cash flow, increasing tax liabilities, and triggering a wave of tactical liquidations across multiple sectors.
Construction and hospitality hit hardest
The construction and hospitality sectors have borne the brunt of the insolvency crisis. Construction has been particularly badly affected, with 3,933 companies entering insolvency in the 12 months leading to September 2025—representing a staggering 17% of all UK business failures.
The construction sector’s reliance on subcontractors has proved especially problematic under IR35. The rules require medium and large clients to determine a worker’s tax status, but incorrect “outside IR35” determinations have led to massive retrospective tax bills from HMRC in recent years. Many construction firms, already operating on razor-thin margins, have found these unexpected liabilities impossible to absorb.
The situation has been compounded by what industry insiders call “talent flight”. According to a report by Carrington West and IPSE, many skilled contractors have simply refused to accept “inside IR35” roles.
At the time of the report, Qdos CEO, Seb Maley, explained:
The difference between a contractor working outside of IR35 or on the payroll in whatever capacity is significant. For instance, if a business decides that your contract belongs inside IR35, you could take home anywhere up to 30% less after tax. So, it’s worthwhile that any genuine contractor does whatever they can to demonstrate to their client that they’re self-employed.
However, if a hiring firm is set on pushing a freelancer to become PAYE, then this forces the freelancer to raise their rates accordingly. For businesses already struggling with rising costs, these increased labour expenses arguably can turn once profitable projects into loss-making ventures.
The CVL trend
Creditors’ Voluntary Liquidations (CVLs) have become the dominant form of insolvency in 2025, accounting for roughly 79% of all cases in late 2025.
Many Personal Service Companies (PSCs) have reached breaking point after years of navigating increasingly complex reforms. With the “outside IR35” market shrinking dramatically, numerous company directors have opted for formal closure rather than continuing to trade under a regime that has diminished their take-home pay by up to 30%, according to analysis by Qdos.
A particularly notable spike in closures occurred in the run-up to 6th April 2025, driven by changes to Business Asset Disposal Relief (BADR). The relief rate went up from 10% to 14% on that date, prompting some contractors to close their companies via Members’ Voluntary Liquidations (MVLs) or CVLs to lock in the lower tax rate on their remaining assets.
HMRC turns up the heat: compulsory liquidations
HMRC’s approach to enforcement has shifted dramatically in 2025, moving away from its previous “soft landing” stance towards aggressive debt recovery.
Compulsory liquidations rose significantly, up 32% year-on-year in May, as HMRC began issuing winding-up petitions for unpaid PAYE and National Insurance contributions resulting from IR35 reclassifications, according to Business Helpline.
Perhaps most controversially, HMRC has targeted “Managed Service Company” (MSC) provider networks, claiming they effectively “managed” contractor companies. This approach has triggered unexpected tax debts for thousands of contractors simultaneously, leading to what some industry observers have described as a wave of “enforced” insolvencies.
Samuel Mather-Holgate, Managing Director & IFA at Swindon-based Mather and Murray Financial commented on how small businesses are not faring well under the current government:
It’s no surprise that the more pressure Labour and Reeves pile upon small businesses will result in more of them going pop. Tax rises, red tape and increases to costs like the national living wage have made it more difficult to remain in business.
Under pressure
The impact of IR35 on insolvencies stems from multiple interconnected factors. Firms must now pay 15–25% more to retain contractors working “inside IR35”.
Back-dated HMRC assessments for what the tax authority deems “disguised employment” have also created enormous, unexpected liabilities. Meanwhile, large firms have increasingly adopted “blanket ban” approaches to contractors, causing many PSCs to lose their entire revenue stream overnight.
The April 2025 tax hike on asset disposal provided an additional legislative push, accelerating company closures as contractors sought to minimise their tax exposure.
IR35 cannot shoulder all the blame for the insolvency crisis, because broader economic headwinds are at play, such as rising interest rates and post-pandemic market adjustments. That said, IR35 has undeniably created a perfect storm for contractors and contractor-dependent businesses alike.
For many of the UK’s self-employed, the combination of increased costs, reduced flexibility and aggressive tax enforcement has proved impossible to weather.
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So where possible we need to adapt to the environment we work in. It’s not going to go back to pre IR35 days. The best way, I’ve found is to work the an umbrella and use salary sacrifice to my pension which actually means I get to keep over 80% of my day rate. I dont work any differently now than I did pre IR35 or when I was permanent. Oh and my work is definitely outside ir35 but my clients have enforced a blanket ban. That irritates but at the end of the day I like the work and the clients.
It’s simply a matter of adapt to survive and hope the future will allow you to thrive!